No Exception for Fraud under Economic Loss Rule

Duty of Good Faith Does Not Create Warranty

Homes are purchased by contract. Washington law denies the home purchaser the right to sue for torts like negligence under the “economic loss rule.” The rule limits the parties to their contract remedies because “tort law is not intended to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement.” Alejandre v. Bull, 159 Wash.2d 674, 681, 682, 153 P.3d 864 (2007). An exception to the rule was created for fraudulent concealment claims.

In Carlile, the court was asked to create an exception for intentional misrepresentation (common law fraud). The two tort claims have distinct elements. A claim for fraudulent concealment requires a plaintiff to show:

(1) [that] the residential dwelling has a concealed defect;

2) the vendor has knowledge of the defect;

(3)the defect presents a danger to the property, health, or life of the purchaser;

(4) the defect is unknown to the purchaser; and

(5) the defect would not be disclosed by a careful, reasonable inspection by the purchaser.

The nine elements of intentional misrepresentation (common law fraud) are:

(1) representation of an existing fact;

(2) materiality;

(3) falsity;

(4) the speaker’s knowledge of its falsity;

(5) intent of the speaker that it should be acted upon by the plaintiff;

The CPA does not define “unfair or deceptive act or practice.” Whether an alleged act is unfair or deceptive is a question of law. An unfair or deceptive act or practice need not be intended to deceive; it need only have the capacity to deceive a substantial portion of the public.

The assignees in Carlile contended that Harbour Homes engaged in unfair and deceptive practices by making affirmative representations of quality, workmanship, and construction in marketing materials and then failing to provide homes that met the standards as represented. They also contended that Harbour Homes’s failure to disclose known defects in the homes constituted unfair or deceptive acts.

Harbour Homes provided marketing materials with affirmative representations of quality. It represented that in their homes, “maintenance is kept to a minimum for many years due to the high quality of material and workmanship included in every Harbour Home[ ]”; that “[o]ur goal is to provide each of our home buyers with a home of the highest quality and workmanship … [ ]”; and that “[d]uring the course of construction, each of our homes is inspected several times by our quality control managers[,]” among others. The record showed that the homes contained numerous construction deficiencies and that the deficiencies have caused the homes to suffer from excessive deterioration and damage. The deficiencies amounted to the builder’s failure to properly seal and protect the homes from weather and moisture, resulting in water intrusion, rot, and mold in the homes.

The assignee-homeowners also argued that Harbour Homes engaged in unfair or deceptive acts in failing to disclose known defects in the home. The court agreed.

A seller’s failure to disclose material facts to the purchaser in a real estate transaction may support a CPA claim, even if the circumstances do not establish fraudulent concealment. There is a duty on the part of a seller to disclose facts material to a transaction when the facts are known to the seller but not easily discoverable by the buyer.

Breach of Contractual Duty of Good Faith

The duty of good faith and fair dealing is implied in every contract. Badgett v. Security State Bank, 116 Wash.2d 563, 569, 807 P.2d 356 (1991). This duty obligates the parties to cooperate with each other so that each may obtain the full benefit of performance. But the duty of good faith does not “inject substantive terms into the parties’ contract.” Rather, “it requires only that the parties perform in good faith the obligations imposed by their agreement.” Washington’s Supreme Court has “consistently held there is no ‘free-floating’ duty of good faith and fair dealing that is unattached to an existing contract.” The duty exists only in relation to performance of a specific contract term. If there is no warranty duty in the contract, the duty of good faith does not create the term.

Although there was precedent that favored Harbour Homes, Division One signaled that it was willing to protect home buyers through the consumer protection act.